Section 80C of the Income Tax Act offers individuals and Hindu Undivided Families (HUF) the opportunity to avail a tax deduction of up to Rs 1.5 lakhs. This provision allows individuals to reduce their gross total income, resulting in lower tax liability. This article provides a comprehensive explanation of all the deductions available under Section 80C and its subsections. Under Section 80C, taxpayers can claim exemptions for investments and expenses made during a financial year, up to the specified limit of Rs 1.5 lakhs. It is important to note that these investments and expenses must be made within the relevant financial year to qualify for the deduction claim. For instance, to claim tax deduction under the old regime for the assessment year 2022-2023, the investments and expenses should have been made between April 2021 and March 2022.
It is worth mentioning that the deduction under Section 80C is applicable exclusively to individual taxpayers and Hindu Undivided Families. Partnership firms, Limited Liability Partnerships (LLPs), and companies are not eligible for this deduction.
NEW REGIME VERSUS OLD REGIME
The deductions available under Section 80C serve the dual purpose of tax savings and encouraging savings and investments among taxpayers. The limit for deductions was increased from INR 1 lakh to INR 1.5 lakh in the 2014 Union Budget. However, despite appeals from various stakeholders, there has been no further increase in the limit since then. As the next Union Budget approaches, there is a widespread expectation among the general public for an increase in this limit.
It is important to note that taxpayers who have chosen the new tax regime introduced in the 2020 Union Budget are not eligible to claim deductions under Section 80C. The government's intention with the new regime is to simplify the tax system by eliminating tax deductions. Currently, individuals have the option to continue with the old regime and avail benefits under Section 80C or opt for the new tax regime. For salaried individuals, proof of specified investments or expenses is provided to the employer, who deducts tax at source (TDS) on salary income accordingly. Other individual taxpayers may consider the eligible deduction while calculating advance tax payments. The eligible investments or expenses are then reported in the income tax return by the taxpayers.
The following are the discussed categories of investments or expenses that are eligible for deduction under section 80C of the Act:
- Recognized Provident Fund (RPF) and Public Provident Fund (PPF): RPF and PPF are social security schemes that individuals can utilize to save for their retirement. RPF is available to salaried individuals, while PPF is available to both salaried and non-salaried individuals. Contributions made by both the employer and the employee towards RPF are exempt up to certain limits. The interest earned and withdrawals from RPF are also tax-exempt. PPF allows individuals to invest a maximum amount annually, and the interest earned and withdrawals are tax-free.
- Life Insurance Premium: Payments made towards life insurance premium are eligible for deduction, subject to certain conditions. The eligibility criteria depend on the premium amount in relation to the sum assured. Deductions can be claimed for policies covering self, spouse, and dependent children, provided the policies are obtained from registered insurance companies.
- Unit-Linked Insurance Plan (ULIP): ULIP is an insurance cum investment plan that offers life insurance coverage and market-linked returns on maturity. Premiums paid towards ULIP are eligible for deduction under section 80C, and the maturity amount is also tax-exempt, provided the annual premium does not exceed a certain percentage of the sum assured.
- Equity-Linked Savings Scheme (ELSS): ELSS is an investment scheme where a significant portion of the funds is invested in equity instruments. There is a mandatory lock-in period of three years for ELSS investments. While long-term capital gains up to a certain limit are tax-free, any gains above that limit are subject to long-term capital gains tax.
- Sukanya Samriddhi Yojana (SSY): SSY is a saving plan specifically designed for girl children. Investments made in SSY are eligible for deduction under section 80C. The account can be opened by parents or legal guardians, and the maturity proceeds are tax-exempt.
- Senior Citizens Savings Scheme (SCSS): SCSS is a scheme aimed at providing regular income to senior citizens. Individuals aged 60 years and above, or those who have opted for certain voluntary retirement schemes after the age of 55, can invest in SCSS. The principal amount invested in SCSS is eligible for deduction under section 80C, but the interest earned is taxable.
- Tax Saving Fixed Deposits (FDs): Certain banks offer tax-saving fixed deposits where the initial investment qualifies for deduction under section 80C. These FDs have a lock-in period of five years, and the interest earned is taxable.
- National Savings Certificate (NSC): Investments made in NSC are eligible for deduction under section 80C. NSC has a five-year maturity period, and the interest earned is taxable. However, if the interest is reinvested in NSC, it can also be claimed as a deduction under section 80C.
- Repayment of Principal Component of Housing Loan: Repayment of the principal component of a housing loan instalment is eligible for deduction under section 80C, provided certain conditions are met. The house must not be sold within five years from the end of the financial year in which possession was obtained.
- Stamp Duty and Registration Charges: The stamp duty and registration fees incurred for the purchase or construction of a house property can be claimed as a deduction under section 80C within the specified limit.
- Children's Education Fees: Tuition fees paid to educational institutions in India for a maximum of two children can be claimed as a deduction under section 80C. The deduction applies to tuition fees only and excludes additional expenses.
- Other investments or expenses: There are additional investments, such as Infrastructure Bonds and NABARD Rural Bonds, that qualify for deduction under section 80C.
In conclusion, Section 80C of the Income Tax Act provides taxpayers with a range of eligible investments and expenses that qualify for deductions. These deductions help reduce the taxable income of individuals and contribute to potential tax savings. Taxpayers can explore these various avenues to maximize their eligible deduction of INR 1,50,000 per financial year.